EBITDA – What You Must Know

EBITDA (Earnings before interest, taxes, depreciation, and amortization)(Pronounced ee-bah-dah) and Adjusted EBITDA, are terms that every buyer and seller of a business must understand.

EBITDA almost always measures cash flow without regard to interest income or expense, taxes, and the non-cash expenses of depreciation and amortization. EBITDA determines the value of and is used by lenders to determine whether they will make loan, and if so, how much, and on what terms.

EBITDA is not an accounting term. It is used by business intermediaries like PacificBusinessAdvisors.net; private equity investors; lenders, including the Small Businesses Administration (SBA); and most buyers and sellers of businesses.

Adjusted EBITDA is exactly what you would expect. It is EBITDA that has been adjusted usually by an agreement of the buyer and seller of a business. These adjustments are usually called add-backs. The rationale behind these add-backs is that these expenses are one-time expenses, or expenses of the owner that can be eliminated by the buyer.

Common add-backs include:

  • The cost of payroll for certain family members,
  • Travel expenses,
  • Entertainment expenses,
  • Luxury automobile expenses, and
  • Club memberships